Recovery and resolution planning for systemically important banks

Systemically important financial institutions can put entire economies at risk in a crisis. In the absence of international insolvency legislation, recovery and resolution planning mechanisms have been enhanced since the 2008 financial crisis with the aim of ensuring that systemically important institutions can be stabilised, restructured or removed from the marketplace in an orderly fashion at the earliest possible stage.

Under some circumstances, the failure of systemically important financial institutions could have serious repercussions for national economies as key financial services would no longer be available. Such institutions are referred to as "too big to fail" – they benefit from an implicit state guarantee because the government cannot afford to let them collapse. This gives rise to a moral hazard and, by acting as an indirect subsidy, tends to distort competition.

Recovery and resolution planning (RRP) is currently high up on the international regulatory agenda and has also become firmly anchored in Swiss law.

The aims of RRP are to identify risks to the stability of the financial system due to systemically important financial institutions and to find viable ways to deal with the impact of a crisis.

Recovery concerns measures to stabilise an institution, while resolution concerns restructuring and winding up. FINMA and the institution have different tasks when it comes to drafting the RRP.

Resolution comes into play in a crisis when recovery efforts have failed. FINMA can order corporate actions whereby bondholders play a part in rescuing the institution by means of a bail-in. This is intended to remove the need for the implicit state guarantee and thus for a bail-out funded by taxpayers.